The Economic Tipping Point And Start Of The Third Wave
Nearly every single bank in Europe is at risk of being full nationalized. Japan and other Asian countries are reporting Depression sized dropoffs in exports. China is close to having an official recession. There is growing worry in the UK that they are about to go the way of Iceland, with a complete currency collapse. People are starting to wonder if the UK as a country is bankrupt, no doubt fueled an increase in secrecy over the money supply. The most visible economist that predicted the crisis has upped his loss estimates to $3.6 trillion, meaning we’re only about one-third of the way done.
These stories are a leading edge of the third wave of the crisis. The first wave started in Fall ’07 with the beginnings of a credit crunch. The second wave really started in March ’08 with Bear Stearns but picked up speed when Lehman went bankrupt: this is when it became clear all the major institutions would fail without government support and thus take down the economy. The third wave is when governments start falling — and some countries go bankrupt — because a collapse in global trade destroys the fundamentals of economies to an extent that governments can no longer manage them. The fourth wave will be when countries start fighting amongst themselves over economic resources, and cooperation starts falling apart completely. At that point there will be trade barriers and trade/investment will be used as a foreign policy tool.
People that look only at the headline economic numbers of the United States are missing the picture. They say, “Sure, things are bad, but on their face they don’t even look as bad as the ’82 recession.” The difference is that recession was instigated by the Fed in order to break inflation, and did not see deflation nor a collapse in world trade (or the government having to guarantee $7 trillion of funds). Looking at the full global dynamics of the current crisis, it is very clear that the same factors are in play that preceded the Great Depression and the forgotten 1873-1879 Long Depression (which was originally called the Great Depression).
I don’t write this out of helplessness, far from it. In fact, the “tipping point” I referred to in the title is what I see as the point of recognition that occurs during the third wave. In the first two waves, the emphasis is on how best to help the economy and get it running again. While there are some political undertones, the debate is driven primarily by policy experts and elected officials, who tell us to remain calm and help support them get things back to normal.
However, when the third wave takes hold, there is a sharp decrease in global economic activity and the weaker nations are threatened on a fundamental level. It is no longer about getting back to “normal,” it is about just trying to stabilize and survive. Right now many people are primarily concerned when looking at their 401Ks and wondering what investments they should make to get back on their retirement track; in the middle of the third wave that’ll switch to being concerned about making it through the next year. At that point, “the economy” becomes very politicized, perhaps the overriding and near sole political concern. All hope for normalcy disappears.
The faster that we accept that we aren’t going back to “normal” (and our “normal” was anything but) the faster we can start having a political debate about how to allocate our newly limited resources. Obama’s proposed stimulus package has some of that, where it’s about a fundamental reworking of how we define our economic identity, but unfortunately it’s been billed as a solution to our ills. It definitely isn’t.
I don’t write these posts to be doom and gloom, but to warn people that I think that their livelihood will be affected by political decisions in a way that many of us can barely imagine. As such, it’s important to start getting involved politically both towards the federal government and on the community level, and think it’s wonderful that we now have a president that understands that. It’s up to all of us to not only engage him, but our fellow citizens as well, and move to an environment where we are clear headed, resolute and compassionate. Otherwise, there is a good chance that our economic crisis will morph into a political crisis, and the last wave: War.
10 Responses to “The Economic Tipping Point And Start Of The Third Wave”
Mikkel, I continue to hope you find Roger Bootle's second lay book (“Money for Nothing”) and get to read it. (Also the first if you can get it, “The Death of Inflation.”)
It's not the end of history right now, nor even another Great Depression. But it could get worse before it gets better, certainly. Each new round of job losses and poor reports shows that. Even when I see ads for sales, I take notice.
The decision is being made to intervene, if only “temporarily,” to stimulate the economy back to something like normality. Hopefully the wrong things like trade restrictions and trade wars between nations won't make things worse, while the wrong lessons otherwise will not be learned, such as a perpetual need to run deficits and spend ever more.
Go ahead, Obama and Company. There's a metaphor for you here (easy to spot — relative rather than absolute, though interest rates and growth rates might be used as a gauge instead). (The following is also likely to be of use to some readers out there, not limited to North Dakota or Minnesota, either, but anywhere you want a faster warm-up, lowered emissions at warm-up, and better warm-up fuel economy.)
http://www.zerostart.com/UserFiles/File/08%20ZE…
Alright I'll try to get around to it. You always say the same thing though that it's not another Depression but have never actually articulated the views of why. I mean reading the summary of the Bootle book I can't say I disagree with its premise, but that assumes a global paradigm shift and a harsh readjustment (and quite frankly a restructuring of our economies completely because the labor market can't support that new vision). Instead, countries are making moves that are making trade imbalances worse and putting the government in front of the bad debt train. I'm very skeptical that people will wake up in time to avoid another depression scenario, especially because everything is reactionary. Part of the reason for saying what I think is going to happen is to try to get people to become forward looking and hope that politically speaking there will be a greater movement towards a future vision, with filling in the gaps as they appear. Instead everyone is looking back to the past.
I wonder where the U.S. plans on getting a trillion dollars plus in additional debt. Does the Obama Administration really believe that can borrow a trillion dollars from the middle east and China to help the U.S. economy?
So. . . can we tar and feather the Bushies yet? I realize their negligence was only part of the equation, but had a greater premium been placed on having intelligent people in the white house to begin with (think dumb as a fencepost electorate here) then perhaps this could have been avoided, or at least lessened to the point of not being out of control. I'm willing to be responsible for my own poor judgement, but I hate being the victim of others – especially those who are in positions of influence and power but who are proven to be ittle more than fools.
The complaint you have against DLS–that he always says the same things but never gets around to defining what he means is the same complaint I have about you.
Maybe you could answer a few questions:
Is what you're calling the third wave already under way?
If yes, what event signaled its beginning?
If no, when will it start?
When will the UK actually go bankrupt?
If the UK doesn't go bankrupt by the time you predict, does that mean your prediction has been proved wrong?
What event is likely to indicate the onset of the fourth wave? Since I'd guess a fourth wave to mean war between two countries over some natural resource–like water?–where will it begin? How far will it spread?
You ought to lay down some markers. As time unfolds, we can judge your accuracy. And I'm not saying you have to predict anything to the second, but maybe to the quarter?
You're just too vague.
I'm not sure whether it's “started” or is just about to start. To me the trigger when a major government's combined intervention (either through bailout or nationalization) exceeds its GDP. There are many candidates that can cause this, even just counting individual banks. I believe if it hasn't started, it will in the next quarter or two.
What occurs once that happens is that bank stress shows up in measurements of the country's economic well being. For countries with their own currency, it causes a currency collapse. Look at how quickly the pound is crashing. The same thing happened to Iceland and people on the front lines of that crisis are similarly worried.
Spain, Italy, Greece and Ireland are in a similar boat, but since they use the Euro it's masked more. Their stress pops up in credit default swaps against their government bonds and bickering is so intense that there are whispers of a Euro breakup. [On that point I'm not sure because some smart commentators think it's unlikely, but also because the stress was due to France and Germany being so strong relatively speaking that there was stress between the countries. Now they are starting to have sharp contractions as well so the Euro will be able to devalue easier.]
I have no idea when the UK will officially go bankrupt, they may be able to spread it out over a long period of time. The psychological line in the sand will be if the pound falls further from current levels, and cannot rebound within the next six months. That will surely lead the way to $:pound parity and cause mass investment flight, from which the UK will have a hard time recovering. They will have a decision to make about accepting rising unemployment and a severe recession (with severe social spending cut backs), or defaulting on their debt and trying to get a renegotiation. It just depends on how much political pressure there is…but one of those will happen within the next year and a half unless I'm totally off.
The fourth wave doesn't necessarily have to be over physical resources, just economic ones. The most obvious example of this to us is if China breaks its peg with the dollar. Right now the Fed is trying to inflate but they can't because China (and to some extent Japan and the petro states) make sure our currency can't fall too much. This means that we are going to continue to see domestic deflation and increased unemployment, while those countries squeeze as much out of us as they can to keep their economies from collapsing. (The “technical” term for this is a “beggar thy neighbor” policy.) However, at some point either we will have to start having tariffs and begin a trade war, or else they will have massive inflation and be forced to break the peg. Either of those will have severe consequences and be a political weapon. China has already started laying the groundwork to blame us for all their economic ills.
If you really timelines, I'd say that a major country (top 30 in the world) will go default in the next two years, at least two-three other countries will have a currency crisis in that time, and trade wars will start to emerge. We'll also have about 12% unemployment by then. The fourth wave trade wars would pick up somewhere around two-three years from now.
If i'm wrong you'll know because unemployment will stop at around 9%, consumer spending with jump 10-15% and global trade will increase about 20%. Also inflation will be around 5% but stay there for a year or so, and oil will go back up to $80-$100 a barrel.
Oh, and we'll go 6-9 months without government injections of capital into banks.
George I might be too late in my timeline about phase 4. It could come earlier considering that the site that has been most forward looking and convincing has an article “US Declares Economic War.”
Republicans are to blame for causing the Great Depression and the current economic collapse by favoring monopolies, big business and the wealthy. These policies squeeze the masses between relatively low wages and high taxes and prices. The Federal Reserve is forced to try to maintain the standard of living by expanding the money supply, which produces unsustainable credit-driven booms. Eventually, consumers’ credit runs out, especially since the debt financing from the savings of the wealthy is at high interest rates. When markets fall, brokerage firms, that lend money on the margins (e.g., several dollars for every dollar an investor deposits), call in loans, which cannot be paid back. Banks fail as debtors default on debt.
Democrats make sure depressions continue until world war. They believe in a nationally planned economy including higher taxes on corporate profits, increased federal government control over the economy and money supply, intervention to control prices and agricultural production, complex social programs and wider acceptance of unions. Interference in the economy help cause depressions, and government efforts to prop up the economy after only makes things worse by delaying the market's adjustment. We need a new political party that favors free markets, small business, the middle class and antitrust.
Mikkel,
I haven't had time to remark as much as I would like — I've been intrigued by deflation for years in addition to having an interest in inflation, and I am aware of what happened in Japan, which is the closest model (Japan in the 1990s) for what we should face now, but where I object to the disaster claims is where there is hype and sensationalism; this is not the Great Depression with unemployment and strife that we saw then — at least, not yet. The hype is not only a contemporary feature of our social behavior and news presentation, but is an example of a manufactured or hyped “crisis” that certain people in government and related special interests are all too eager to exploit.
We mainly or simply have to wait to see what will happen. Letting things resolve themselves was my preference all along, with second choice being to let at least the major events happen and then respond to these rather than delve into the unknown to try to prevent what in many cases isn't completely or easily predictable.
We will see. I am not as optimistic for the simple fact that this is worldwide. IMO Japan would have been screwed back in the 90s if there hadn't been the largest global expansion ever.
I agree that it shouldn't be worse than the Great Depression but I think the same dynamics are there and players are responding similarly.